Factors in the Hog Market. Michael Swanson Ph.D. Wells Fargo Ag Industries

Transcription

1 Factors in the Hog Market June 2011 Michael Swanson Ph.D. Wells Fargo Ag Industries

2 System analysis: new linkages No more domestic markets No market will be purely domestic New secondary drivers Global volatility Zero predictability Zero control Margin management Reading the blitzes Land as an asset Wells Fargo Ag Industries - 2

3 Global factors specific implications Growth drivers Population minor Income major Policy wildcard Suppliers Interconnected markets Opportunity costs Implications Wells Fargo Ag Industries - 3

4 The role of population Divergent Growth rates falling Median age rising Demographic politics Who is generating the numbers? Are they good numbers? What agendas do they have? Why does it matter? Wells Fargo Ag Industries - 4

5 The most predictable factor Annual Change in Pct Global Population Growth Rate 1.75 High Low Source: UN, Wells Fargo Ag Industries Wells Fargo Ag Industries - 5

6 A dependent factor 45 Years Median Age Low High Source: UN, Wells Fargo Ag Industries Wells Fargo Ag Industries - 6

7 The role of income Primary factor Price Volatility China versus the world Predictability Weighting Transition Wells Fargo Ag Industries - 7

8 Easy to assume $13,000 Global: Real Per Capita Income $12,000 $11,000 $10,000 $9,000 $8,000 $7,000 $6,000 $5,000 $4, Wells Fargo Ag Industries - 8

9 A very naïve forecast YOY Pct Chg 4.5% Global: Real Per Capita Income 3.5% 2.5% 1.5% 0.5% -0.5% -1.5% -2.5% Source: USDA -3.5% Wells Fargo Ag Industries - 9

10 The China question: You will be wrong Wells Fargo Ag Industries - 10

11 This is a bad forecast $12,000 China: Real Per Capita Income $10,000 $8,000 $6,000 $4,000 $2,000 $ Wells Fargo Ag Industries - 11

12 Why so little volatility? YOY Pct Chg 15% China: Real Per Capita Income 10% 5% 0% -5% Wells Fargo Ag Industries - 12 Source: USDA

13 Have you tried the Chinese Black Swan? Black Swan Low probability High impact A multiplicity of confusions Possible probable A snowflake versus snow storm You have: Underestimated volatility Overestimated liquidity Wells Fargo Ag Industries - 13

14 The role of biofuels policy Policy is political Institutional capture Small becomes big What numbers are right? Follow the money Agricultural budget Transportation budget Wells Fargo Ag Industries - 14

15 Without US ethanol policy row crop prices would be significantly lower Wells Fargo Ag Industries - 15

16 Biofuels outside the US 65% Global Grain Usage (Excl. US) 60% FSI 55% 50% 45% 40% Feed 35% 30% 1969/ / / / / / / / /2010 Wells Fargo Ag Industries - 16

17 The US is the market maker for grain 30% US Share of Global Grain Production 25% 20% 15% 10% 5% 0% 1969/ / / / / / / / /2010 Wells Fargo Ag Industries - 17

18 Biofuels inside the US 70% Feed US Domestic Grain Usage 60% 50% FSI 40% 30% 20% Exports 10% 1969/ / / / / / / / /2010 Wells Fargo Ag Industries - 18

19 Ag payments are now routed thru transportation Government Payments 14 Billions of dollars VEETC Pmts Total ag direct pmts E 2012E Wells Fargo Ag Industries - 19

20 New Rules = New Game Energy Major cost Crop producers Food manufacturers Major price setter Geopolitical volatility + weather volatility Volatility feedback loop Portfolio trades Volatility attracts traders China globalizes domestic markets Wells Fargo Ag Industries - 20

21 This drives: food + packaging + transportation 150 $s per barrel Nearby Crude Oil v Corn Jun-07 Jun-08 Jun-09 Jun-10 Jun-11 Source: NYMEX, Wells Fargo Economics Wells Fargo Ag Industries - 21

22 What s the point of predicting? Wells Fargo Ag Industries - 22

23 How it entered your world Daily Corn Price Volatility 32% 30% % 24% 22% 20% 17% 15% 15% 13% 14% 14% 2007-now 10% 8% 9% 5% 0% 5% 5% 4% 4% 3% 2.3% 2% 2% 1.3% 0.5% 0.6% 1% 0% 1% 1% 0% 0.2% 0.5% -8% -7% -6% -5% -4% -3% -2% -1% 0% 1% 2% 3% 4% 5% 6% 7% 8% Source: Wells Fargo Ag Industries Wells Fargo Ag Industries - 23

24 The US remains key exporter Dominant Large producer High per capita supply Productivity Under-priced on land Historical International Wells Fargo Ag Industries - 24

25 There s no one to turn to for grain Kgs per capita 3,500 Australia Grain Production 3,000 Canada US 2,500 2,000 Argentina Ukraine 1,500 Russia EU-27 1,000 China 500 India - Millions of Metric Tons Wells Fargo Ag Industries - 25

26 In oilseeds we matter too Kgs / per capita 3,000 Oilseed Production Argentina 2,500 Paraguay 2,000 1,500 1,000 Canada US 500 Brazil - China Millions of metric tons Wells Fargo Ag Industries - 26

27 Beyond climate and soil 8 Grain Yield: Metric Tons per Hectare excluding rice 7 6 US: 1.73% annual growth rate 5 4 ROW: 1.76% annual growth rate / / / / / / / / /2010 Wells Fargo Ag Industries - 27

28 Where is protein demand headed? Protein China is 54% lower in per capita demand Hong Kong distorts the statistics Quality issues US maintains a safe source image What the US market wants foreign markets do to Bottlenecks Grain/silage production Yields/irrigation Socio-economic Wells Fargo Ag Industries - 28

29 There s no one to turn to for grain Kgs. Commodity Meat, Beef and Veal Meat, Swine (KG) Poultry, Meat, Broiler Grand Total Country Hong Kong United States Argentina Kuwait Brazil Australia Qatar Canada United Arab Emirates EU Chile Belarus Uruguay Singapore Taiwan Mexico Korea, South Russia Kazakhstan Switzerland Venezuela Jamaica Bahrain China Wells Fargo Ag Industries - 29

30 China already has the pork Kgs / per capita 140 Meat Production: Pork 120 Canada EU China 80 US Brazil ,000 10,000 15,000 20,000 25,000 30,000 35,000 40,000 45,000 50,000 Wells Fargo Ag Industries - 30

31 They need beef Kgs / per capita 400 Meat Production: Beef Argentia Brazil 100 US 50 China EU ,000 4,000 6,000 8,000 10,000 12,000 14,000 Wells Fargo Ag Industries - 31

32 And, they need broilers Meat Production: Broilers Kgs / per capita Brazil US EU China - - 2,000 4,000 6,000 8,000 10,000 12,000 14,000 16,000 Wells Fargo Ag Industries - 32

33 What about land values? Is US ground cheap? Wells Fargo Ag Industries - 33

34 Land prices factor into equation Row crop cash rentals CA open crop ground $150-$250 / acre Chinese open crop ground $800 / acre Tree nut standing orchards CA almond groves $16,000 / acre Indian almond groves $30,000 / acre Adjusted for productivity US ground is cheap Adjusted for exchange rate Adjusted for productivity Wells Fargo Ag Industries - 34

35 The important drivers Row crop prices Biofuels Global income Global competition Interest rates US dollar strength Alternative investments Home building 1031 transfers Wells Fargo Ag Industries - 35

36 The wrong way to look at land $4,500 Land Price in Dollars SW Minnesota $4,000 $3,500 $3,000 $2,500 $2,000 $1,500 $1,000 $500 $- Jan-68 Jan-71 Jan-74 Jan-77 Jan-80 Jan-83 Jan-86 Jan-89 Jan-92 Jan-95 Jan-98 Jan-01 Jan-04 Jan-07 Jan-10 unpublished land market data from UofM Dept. of App. Econ Wells Fargo Ag Industries - 36

37 Trading corn for corn 1,400 Price of Land: Bushels of Corn per Acre SW Minnesota 1,200 1, Data: Raup et al., forthcoming 2011: Analysis Wells Fargo Wells Fargo Ag Industries - 37

38 Yield doesn t stand still 180 Corn Yields Bushels Per Acre SW Minnesota Wells Fargo Ag Industries - 38

39 Yield and price adjusted 9 Years of Yield Traded per Acre SW MN unpublished land market data from UofM Dept. of App. Econ Wells Fargo Ag Industries - 39

40 The takeaways Wells Fargo Ag Industries - 40

41 Great future if you can take the heat Plan don t predict Scenarios are better Snowflakes versus snowstorms The volatility will be extreme Buy or sell: Smart insurance Leverage and risk management are key Don t get blinded by the dollars The greatest asset: discipline Wells Fargo Ag Industries - 41